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Bitcoin Prosecutions Threaten Its Survival

One of the most interesting competing currency wannabes is firmly in the crosshairs of law enforcement.  As my friend Declan McCullagh writes for CNET, "Homeland Security cuts off Dwolla bitcoin transfers," Bitcoin's survival may depend on whether it complies with (granted, onerous) government regulations–especially the anti-money laundering laws.  Declan doesn't actually go that far, but he should. 

As my colleague here George Selgin has explained Bitcoin is not (yet) a currency in that it fails the "generally accepted" test.  From its inception until the FinCEN guidance, there has been a remarkable increase in the growth of the Bitcoin market.  The trend line intimated that Bitcoin *might* be on its way to becoming a full-fledged, generally accepted and widely recognized currency.  That path is now at a crossroads.

Explains Declan:

The U.S. Department of Homeland Security confirmed it has initiated legal action that prompted the Dwolla payment service to stop processing bitcoin transactions.

Nicole Navas, a spokesperson for U.S. Immigration and Customs Enforcement, confirmed the legal action to CNET this afternoon.

Dwolla, a Des Moines, Iowa-based startup, which raised $16.5 million in funding two weeks ago, notified users about the move earlier Tuesday. It blamed the decision on "recent court orders" limiting its ability to send money through Mt. Gox, the largest bitcoin exchange.

 As I have said privately many times and publicly at the Privacy Working Group, the FinCEN guidance on emerging payment systems (e.g. Bitcoin) raises more questions than it answers and the best way to make sense of the guidance is that law enforcement had prosecutions in the works and needed FinCEN to cover their backsides to try to make them stick.  I fear the prosecutions we are seeing now will just be the tip of the iceberg.

Whether Bitcoin can continue on its path towards a full-fledged, generally-accepted currency or not will largely depend on if the Bitcoin community can get its act together and respond appropriately to the FinCEN guidance.